Blue Owl Capital Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Glenn Schorr - Evercore ISI - Analyst : Hello there. Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Hello, Glenn.

Question: Brian McKenna - Citizens - Analyst : Thanks. Good morning, everyone. So a question on private wealth. It's great to hear that flows have held up quite well even with the pickup in volatility. But two questions here. One, have you seen any evolution in the behavior of retail investors and how they allocate to alternatives, specifically during periods of volatility? And then two, given that retail investors are a lot more familiar today with the Blue Owl brand and the types of products you offer, is there the potential for adoption timelines to be accelerated for future products like in alternative credit? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Yeah, thanks, Brian. Yeah, look, private wealth in this environment, and obviously, these are all evolving marketplaces. But what we have to keep in mind is how much just secular growth and opportunity there is in the private wealth channel that even when you get into sort of individual investor, questions of, does this person X make an investment or not make an investment in a given quarter, there's so many new participants joining. Let me give you just a live example as of yesterday, take a firm, Edward Jones. Edward Jones manages $2.2 trillion. And you know what share of that is in alts? Zero. And they are now just launching alts, and we are one of their premier launches as part of that. So here's an example of -- I mean, talking about white space, talk about greenfield, whatever you want to call it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call So I think a couple of things I would observe. One, the addressable market is gigantic and penetration is very low. Penetration is rising. We see it. We have multiple new platforms that are rolling out our products. And an example like that, they're big. And they present really substantial opportunities, number one. Number two, during times of volatility and uncertainty, I expect that we are going to see -- again, let's say that short-term perturbations when people just get scared for a week and they're hiding under the covers. The reality is people then realize the benefits. This is the exact conversation I have with a group of individual FAs yesterday. This is when people realize the benefits of the stability and predictability, particularly in Blue Owl products. So it's not an all generic statement. I mean clearly, there's a different tone these days toward private equity, for example. But income-oriented inflation protected, downside protected strategies resonate loud, and it's exactly in this environment where those strategies for individual investments, individual investors and their FAs shine. When everything is rosy, everything looks rosy. When things are volatile, all of a sudden, there's a reason to pay attention. And guess what? Our products performed great during this last quarter. Our products continue to perform great. We continue to deliver great income every month to our investors. So I think we're actually quite optimistic. Just like in institutional markets, frankly, after a period of dislocation, we tend to come out ahead. Again, I'm not trying to cast what happens in a week, in a month. But I'm saying this kind of environment, I want to say this with the right words, we don't want the world to look like this, but this is a very good time for us. We win coming out of environments like this.

Question: Bill Katz - TD Cowen - Analyst : Okay, thank you very much. I have some difficulty on my end as well. Just maybe -- I may have missed a little bit of this. I think during your prepared comments, you had mentioned that the -- you expect the institutional business to accelerate a little bit as the year unfolds. I was wondering if you can unpack and talk about some of the drivers underneath that, could be byproduct or some of the more recent platforms you picked up, I think maybe be curious about IPI and Atalaya, respectively. And then just a technical question. On the transaction fees, I was a little disappointed that it sort of dropped sequentially despite the originations being pretty durable quarter-to-quarter. I was wondering if you could help unpack what the drivers are as we look ahead. Thank you.

Question: Craig Siegenthaler - Bank of America - Analyst : Can you guys hear me okay?

Question: Craig Siegenthaler - Bank of America - Analyst : There we go. Okay. Good morning Marc, hope everyone's doing well. Our question is on GP stakes. So management fees and GP stakes look a little light relative to fearing AUM growth. So I was hoping you could explain what drove the decline and more importantly, help us with the 2Q run rate.

Question: Craig Siegenthaler - Bank of America - Analyst : Thanks Alan.

Question: Steven Chubak - Wolf Research - Analyst : Hi, good morning. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call

Question: Steven Chubak - Wolf Research - Analyst : So hope you're both doing well. So I wanted to ask just on some of the spread and pricing dynamics that you're seeing in the market. Just given the recent widening in high-yield credit spreads. What have you seen in terms of spreads in the private markets, the types of returns you're generating on new origination activity? And how you see competition evolving versus the BSL market? Is there any evidence of bank retrenchment? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Sure. So look, dislocated environment we all know are good for us and good for our business in terms of originations and things like spreads. It's very early. So I can't give you a meaningful statistical answer yet, right? This reset takes some time to roll through a private market versus the public market. But let's start with a couple of facts. The syndicated market has essentially shut down. So in terms of competition with the BSL market, that is exactly what happens rather instantaneously and we've been making this point about the sort of on and off nature of public markets and the durable longer-cycle nature of private credit, which, by the way, is really good for the economy, but certainly good for our business, too. So I believe there was the longest stretch of time, 15 days without a single deal being launched, which is the longest period of time in something like decades that 10 years, that we've gone 10 years without 15 days of launching a deal. So I mean, look how abrupt these markets are. It's exactly the reason the BSL market -- it's important we have a BSL market. I really mean that. We don't wish it to be unhealthy. But it's so on again, off again. It's only proving the reason people should partner with private credit. We will come out of this period of time, I expect, with yet again more market share and more firms committed to using the private market because they see the value. Yes, they pay more. Yes, they have a more stringent document. Yes, they have more invasive due diligence. Those are all the things that go with doing our job well to protect the capital. But we give something, we give the predictability, the privacy and the partnership, and this market proves it. In terms of spreads, I would expect spreads will start to wind back out. Again, we always kind of operate in this band. If you look over many years now, when the BSL market goes away, it's a factor when people are -- there's more dependence on private capital, more value and predictability in partnership, we rise to the higher end of that band. When everything is wide open, we move to the lower end of that band. And I think we'll now start to migrate back up. I can't prove it yet, it's awfully early. We're starting to see it. We certainly think our capital is more valuable in this environment and we certainly expect to see spreads start to widen, but it will potentially take a little bit of time for that to roll through.

Question: Alex Blostein - Goldman Sachs - Analyst : Hey guys, good morning. Another question for you around just retail. It is super encouraging to see that retail flows are holding up well for you guys and the industry broadly, definitely a bit counter perhaps to what people used to thinking about when it comes to retail and volatility. I thought you guys said retail is tracking well. I was hoping you can characterize that just in a little bit more detail how April is shaping up relative to last couple of months. And bigger picture question, just around strategy, we've seen a number of the large alternative managers now a partner and have a JV with very sizable traditional firms. Curious how you guys are thinking about that? And how big of a part of the strategy on a go-forward basis you think that needs to be in order to succeed in this channel?

Question: Alex Blostein - Goldman Sachs - Analyst : Very well, thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call

Question: Patrick Davitt - Autonomous Research. - Analyst : Hey, good morning, guys.

Question: Patrick Davitt - Autonomous Research. - Analyst : Quick follow-up on that last answer. To be clear, you mean May 1 was 20% lower than April 1?

Question: Patrick Davitt - Autonomous Research. - Analyst : Yeah, okay, cool. And then my higher-level question was you mentioned the non-US sleeves coming online and adding $250 million to the baseline in March. Is that $250 million of baseline we should expect each quarter? And then could you update us on the pipeline of other non-US sleeves like that coming online and layering on through the rest of the year? Thank you.

Question: Patrick Davitt - Autonomous Research. - Analyst : Great, thanks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call

Question: Chris Kotowski - Oppenheimer - Analyst : Yeah, good morning. Thanks. Most of mine have been asked. But just looking at page 26 and the gap between the fee-related earnings and the distributable earnings was larger this quarter and it looks like it was primarily the tax rate. And I'm thinking there must be a seasonal component to that? And what should we expect kind of for a full year tax rate or expense?

Question: Chris Kotowski - Oppenheimer - Analyst : Okay. And same pattern next year, I assume?

Question: Chris Kotowski - Oppenheimer - Analyst : Okay. And then finally, did you give an indication of an expected timeline to the final close on the GP Stakes flagship fund? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director So we expect it will probably drift into early 2026 total. We'll see. Look, our GP stakes fund, I think you all know this, but let me say it out loud because I think reasons I'm not clear on, people have not modeled it this way, but we've said it this way. We expect it to be back-end loaded just like it was last time, just like it's been before. Look, we're off to a very strong start. It is true that people then often like to see some of the deal activity, some of the investment activity. We've actually now done the first investment in that product, making an investment in [Veritas] which is something we've got a long partnership with. So it's a great example, A, it's an A plus firm, great firm doing a great job. And B, it demonstrates the power again of incumbency and being the go-to partner. And so I -- we have a pretty nice active pipeline. So as those roll through, I expect that will continue to contribute to people accelerating or gaining traction on finishing up the funds. So -- but we should assume that it will probably go into early 2026 in terms of wrapping it up. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call

Question: Chris Kotowski - Oppenheimer - Analyst : Okay, alrighty. Thanks, that's it for me.

Question: Crispin Love - Piper Sandler - Analyst : Thanks. Good morning, Alan, in the past, I believe you've talked about 2025 FRE margins in the 57% to 58% range. Margins were a little softer in the first quarter. So can you talk to your expectations and what type of cadence you'd expect for margins throughout the year and if that 57% to 58% level still stands?

Question: Mike Brown - KBW - Analyst : Hi. This is Mike Brown from Wells Fargo. Thanks for taking my questions. Just a high-level question for me. I wanted to ask on the nontraded BDC market. So if the Fed cuts come through as the market expects, it seems like the -- for the industry, the dividends likely move lower. What are the potential offsets that could kind of mitigate that base rate pressure? And then in a scenario of lower dividend yield, do you think investor behavior shifts at all? Like do you think flows hold up? I guess, do they hold up because I guess you'd still have a high relative yield. So maybe if it's 8% or 9%, they can still flow well. Or just curious how you think about that versus the kind of 10%-plus yield that they run at today. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director So let me -- I want to emphasize something just to make a point, and I'll get right into the details of your question. You said, well, if it turns out rates go lower, like now the market expects. I mean think about the volatility in that statement and expectations. That really is the heart of why our products are so great. And this particular product, the direct lending product for Blue Owl is so great. It's about downside protection, about inflation protection which, by the way, inflation numbers look higher, right, not lower yesterday. And about interest rate flow through. So what happens in a lower rate environment? Well, sure. Yeah, the base rate goes lower. But of course, what we're really delivering is incremental return. And in fact, in the environment you're describing and probably the environment we're in right now, a choppier public market, as we just talked about, more value on predictable capital, I would expect spreads come up. So actually, all things equal, the net of that hard, of course, to say, but you probably actually take incremental spread at a lower rate than a higher rate with lower spread because that's actually incremental value add from the manager. But fund flows, and we've been in that environment. Remember, we operated in a 0% rate environment. Fund flows have been extremely strong through multiple years, low rates, high rates. So no, we don't think that does anything meaningful for flows because really, we're going to deliver in that case and even incrementally sort of better return than the risk-free rate, so to speak. So I think we feel very good about that kind of environment for our products. And in fact, probably the last thing I'd say, if we want to deduce that lower rates must correlate with some kind of slowing economy or fear about the economy, then people should move the fact that they should move into this product even more because that's where most importantly of all, our products are about principal predictability and stability and preservation, and that's exactly when people and their FAs, they want to pay even more attention to that question.

Question: Mike Brown - KBW - Analyst : And I'm sure folks would kind of like the lack of volatility in the nontraded product as well, right?

Question: Mike Brown - KBW - Analyst : Thank you for taking my questions.

Question: Benjamin Budish - Barclays - Analyst : Hey, good morning. Thanks for taking the question. Just wondering if you could talk a little bit about your near-term expectations for deployment thoughts on the pipeline? How should we think about gross versus net? And curious if you could provide any color on any changes you're seeing in terms of loan documentation, LP protections, portability, PIK utilization? It seemed like last year when things got more competitive, we were seeing at least more headlines about things like PIK utilization. So what sort of trends are you seeing with borrowers? And how is the pipeline kind of shaking up on a gross to net basis? Thank you. Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Sure. I think maybe -- let me hit deployment in -- we already talked about what was happening with GP stakes. So let me hit deployment in credit and real assets. I appreciate the questions you raised were more particular to private credit. So there's two intersecting lines or two moving pieces, and I can't tell you the net of it in the short term, I think I can give you a pretty good read in the medium term. In the short term, the negative is just lower M&A. That's obvious to all of us, right? There's just less M&A in the world right now, given the uncertainties. The other side is market share, right? Market share comes to us during these kind of environments. In fact, there really is no meaningful syndicated market, someone could sign up for it, but I don't know what they think they might get. So at the end of the day, those two are going to be moving in opposite directions. The net of it all is a little hard to say, but they are offsetting. Over the medium term, here is the structural reality. We're going to have more people come to our market, more people see that it's worth using. And then the PE firms are going to eventually spend that capital. And we, like everybody else, thought first quarter might have been that unlock, obviously, that didn't happen. But those trillions of dollars in dry powder and PE hands are going to work eventually. So we pick up our market share, which I expect we will through this volatile time, and then those dollars go to work, that's a net benefit for us in terms of putting capital to work. So yes, short term, let's all acknowledge the uncertainty of what's the offset between market share versus just M&A activity. And we'll monitor that, of course, closely. It doesn't really matter to our business model. At the end of the day, we can pay these fixed fees. It's just -- in fact, our net originations were higher this quarter than last. So there's a lot of variables, none of which matter much to the performance of our Blue Owl business. But to answer your question on the specifics of the market, we have offsetting variables TBD, what that exactly means. In terms of -- and also on the dimensions you described, let me spend just a minute on. Look, the attributes of the loans continue to be really -- this is the thing we've been trying to emphasize and always will matter to us most. Quality of borrower is paramount, and our quality has continued to be extremely high. You mentioned a series of different attributes of loans. And as you point out, there's a long list of different things that go into a bespoke solution each time. But let me observe this. Our overall loan book continues to perform great. Our nonaccruals, in fact, the number of companies on nonaccrual went down this last quarter, not up. And so we continue to sit in a really healthy place and the new credits we're doing, we very much like. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call And last thing I want to emphasize is something about PIK because it does tend to come up in the financial world, but also in the press. There's two kinds of PIK, we've said this before. There's the PIK by design because it's an extremely durable low LTV cap structure with a huge equity check and a really great business and it's about giving the company by design, ability to invest in its own growth, i.e., software companies. And then there's PIK not by design. And you have to, you have to draw the distinction. And let me say with great and equal clarity, PIK by design is actually, from our point of view, usually an extremely good side. We do that in our strongest credits. Those tend to be our lowest loan-to-value and biggest businesses. So PIK by design in our software product is a good thing. That means we and the sponsor see that as a particularly strong credit with particularly big opportunities ahead of it. PIK because you have to go from cash pay to PIK is a bad thing. There's no other way to describe that. That's not a healthy development. So watch people's portfolios, watch migration from non-PIK to PIK, not helpful. We have some of those. We always will. That's part of the 400 companies, and we equally hold ourselves to that standard. But don't use the blunt instrument of PIK as a shareable portfolio, that's meaningless. And point in fact, PIK as a share of a portfolio is higher in our software business. And say this the right way, isn't everyone who's invested in software credits today, we've been saying this for years, thrilled that that's where they are. Take a look at what's happening. Supply chain, don't have one. Exposure to China, don't have any. I mean think about the things that are now a risk for most companies in the world, not a risk for our software businesses. So we're sitting here with -- our tech portfolio is exactly where you want to be. And yet, it does have a higher percentage PIK by design. So sorry to go deep on that, but I think it's quite important to unpack these variables and avoid sort of the blunt instrument usage. Last thing, let me talk about is real estate on deployment. Deployment is excellent in real assets, both in real estate and in IPI. These markets are really the best we've seen, and we are seeing very strong deployment. So let me give you an example. Real Estate Fund 6 is now 41% called and 90% committed. That fund is basically wrapped up and objective statistics, it's the best set of statistics in a fund we've ever had in real estate. Right now, we -- that fund has an average of a 7.8 cap rate, 17-year average lease duration with 2.7% average built-in rent growth. Think about those attributes for a minute. Those are the best objective statistics we've had in the history of our triple net lease real estate funds. So in IT, we've clearly talked about, I mean, that product, the demand so far exceeds the supply of combination of capital and skills. We are one of the very few people that have both. It's a very complicated business to build. Once you build it, could be a better asset to own. It's these types of attributes, except in that case, in every instance, you talk about companies with $1 trillion market caps and very, very strong investment-grade rates, the case in Microsoft are rating better than the US governments.

Question: Ken Worthington - JPMorgan - Analyst : Hi, good morning. The question (inaudible) REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 01, 2025 / 2:00PM, OWL.N - Q1 2025 Blue Owl Capital Inc Earnings Call

Question: Ken Worthington - JPMorgan - Analyst : Sorry. Let me try anyway. And if I can, I'll requeue. Blue Owl has been building and diversifying its business, wealth real estate, insurance and others. The expansion has been largely domestically focused. Since changes in the value of the dollar and the treasury suggest increased interest outside the US, what are your thoughts about global expansion of the franchise? And I know you have a lot in your plate, but does it make sense to expand outside the US? And is this something in your line of vision? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Well, let's take that in a couple of ways. So look, very important that we raised capital from all over the world. And in fact, that's an accelerated opportunity for us. So I mentioned before, the Middle East has been a tremendously growing market from our point of view. So that's been -- so our global footprint for capital is large. Our global footprint for deployment in select areas is strong. We, in fact, we just announced our first triple net lease real estate Europe deal for our triple net lease Europe product, which again, a brand-new product to our array and one that we think is going to be very successful. IPI operates globally because IPI is working with global enterprises, and they have data centers all over the world, and we work with them all over the world to do it. The key here is really risk and return. We love the fact that 90%, and it is 90% of our firm's capital is deployed in the US because we're in the downside protection business. We can have a wide range of opinions about current policies and trajectories in the US and the global economy. But in terms of safety and security and where you put your money, you'd much rather be inside fortress USA and then outside fortress USA. Everyone, for reasons we understand, are very anxious about what's happening in Asia and the dynamics between China and the US, 1% of our capital is in APAC. I appreciate that has maybe been an exciting story for some people over time. It also seems so exciting right now. We're not about excitement. We're about delivering really steady results. So we'll follow the right kind of users of our capital wherever they wish to be as we have. We'll raise capital around the world. And where there are markets that are stable and attractive and we can earn incremental return without taking incremental risk or more than proportionate incremental risk, absolutely. But we have no grand ambition to just go around the world to go around the world. I think sitting here today, you can see why going around the world, just to go around the world may all now introduce a tremendous amount of risk that frankly Blue Owl doesn't have.